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of the books and records with an additional inspection of collateral if the line is $1 million or higher. Advantages and Disadvantages of the CAPLine Program So what are the advantages and disadvantages of using the SBA Working Capital CAPLine Program? The biggest advantage is access to funding for the small business. As aforementioned, many CAPLines are done by banks that otherwise would decline the loan request. For some beauty store owners, a CAPLine might just be the only available method to finance growth and/or seasonal borrowing needs. A second advantage is the higher advance rates as discussed above. Thirdly, the revolving feature allows the business to pay down the line when cash flow is stronger—this allows the business to avoid unnecessary financing costs—and draw up the line when assets need to be built up. This causes cash flow to be tight. The alternative will sometimes be a term loan with the funds drawn out up front and repaid on a monthly basis over a specified period of time. Lastly, a CAPLine offers an affordable alternative to more expensive working capital sources such as venture capital, credit cards and factoring. The primary disadvantage is the higher cost compared to a conventional bank loan. Fees generally range from 2% to 3.5% of the guaranty amount (e.g., The United States a $500,000 CAPLine with a 75% guaranty of $375,000 and a 3% guaranty fee would result in a loan fee of $11,250), compared to less than 1% for most conventional bank loans. The interest rate is capped at prime + 2.75% (prime is currently 3.25%) for lines above $50,000. The spread above prime for a variable-rate conventional loan is negotiable based on the risk perceived by the bank, but it is generally lower than 2.75%. 64 September 2013 | beautystorebusiness.com What Businesses are Eligible for SBA Financing? While the SBA estimates that more than 90% of businesses in the United States qualify as "small" under its qualifications, there are a few restrictions to borrow under the 7(a) program: • The business must be for-profit • The business must be incorporated in the United States • Size restrictions vary by business type but generally are up to 500 employees or $21 million in annual revenue • The owner must have a "reasonable" amount of equity invested • The business must demonstrate the need for the loan proceeds • The use of the funds must be for a sound business purpose • The business must not be delinquent on any debt obligations to the U.S. government Your bank should be able to help you determine if your business is eligible for a CAPLine line of credit. If your existing bank has no experience with the SBA, then it is advisable to find one that has worked with the SBA. In fact, many banks are frequent participants in the SBA 7(a) program and attain Preferred Lender status with the agency, which results in a streamlined process for loan requests (i.e., quicker and less hassle for you). If you are in the same boat as so many business owners who have been unable to obtain a line of credit for your beauty store, then your ship may have come in. The SBA Working Capital CAPLine program has provided much-needed working capital financing for a growing number of small businesses in recent years, and it could do the same for you. ■ J. Tol Broome Jr. is a Winston-Salem, NC-based freelance writer with nearly three decades of commerciallending experience.